Will the outcome of Greece cause a domino effect?

A credit crunch is thought of as "a severe shortage of money or credit" (BBC News, 2009).  Once companies begin to struggle financially, others can shortly find themselves in similar predicaments. Many around the world began to suffer when the credit crunch of 2008 occurred. In the UK, lots of banks began to suffer as a result of loaning too much money to companies and to the general public. Northern Rock was bailed out by the government due to their dire circumstances. Banks such as RBS soon followed this trend that occurred. Large companies could no longer rely on loans any more as banks were not able to loan copious amounts of money like before. Once the domino effect begins it is difficult for it to be stopped as it quickly gathers momentum.

A concern for many people now is that Greece is suffering immensely as a nation. Leaders in the Eurozone worry that if Greece were to default, and possibly leave the euro, that this would have a big impact on other suffering nations such as Ireland, Italy and Spain (Wall Street Journal, 2012).

Greece has recently managed to reduce its debt to private creditors by 53.5%; any profits made by Eurozone central banks on their holdings of Greek debt will be returned to Greece (BBC News, 2012). It is not just recently that Greece have begun to suffer as in 2010, the EU, IMF and ECB agreed a bailout worth 110bn euros for Greece (BBC News, 2010). It is a worrying sign that only two years later that Greece have pleaded for more help. Banks across Europe are effectively paying for this bailout which means they are the ones that will lose money.  Many experts believe that this second bailout will still not be enough in order for Greece to cope with the debt that is remaining in the long term. Eurozone monitoring will take place but it is already being questioned as to whether this will make a big difference to a dreadful situation.

 So where did it all go so wrong for Greece?

·         Greece was able to borrow money much easier as a result of joining the euro in 2002.

·         Greece spent too much money on high-profile events such as the 2004 Athens Olympics.

·         The country began to suffer financially and began to spend more money than it received.

·         Interest rates increased on borrowings as the nation continued to suffer.

·         Cuts to public sector pay and pensions were declared by the government along with reduced benefits and increased taxes.

 (BBC News, 2012)

Budgets on projects were regularly not met during this timescale as the spending spree lost control. Rumours occurred that statistics of the country’s financial condition were incorrect. Shortly after this respected government figures were accused of tax evasion. There have been widespread protests and demonstrations in Greece (below) against the government.

The idea is that all the cuts in Greece should improve the competitiveness of the nation and therefore have a positive knock on effect that would improve the current state of their economy. It is easy to understand why people in Greece struggle to comprehend this as this outcome looks so far away at the moment.

(Debt help bureau, 2011)

The graph shows how debt vs nominal GDP shot up. Results from 2010 onwards lead Greece to the problem that they now face. The main problem in the scenario is that Greece has, and STILL is, spending more than they receive. The graph shows how the problem began between 2006 and 2009. Spending from this point onwards spiralled out of control and the gap between revenue and expenditure became bigger.

Barton, Newell & Wilson (2003) suggest that there are five key factors as to how company managers can increase their chances of survival during a financial crisis.

1.            Understand and Maximize the Current Cash position

2.            Identify and Aggressively Minimise Operational Risk

3.            Scenario Planning

4.            Review and Prepare for Divestitures

5.            Maintain Confidence of Key Stakeholders

If managers in Greece had paid attention to such academia it may have been possible for them to avoid the scenario they currently find themselves in.

Wage rises and mortgage debts have increased immensely within the last ten years in a lot of European countries. Countries such as Greece have suffered as a result of this.  If Greece were to fall then what would happen to Ireland? If Ireland were to fall then what would happen in other European countries? This chain of events could severely affect many nations; we hope that the UK would not be one to be affected. The UK is not owed a lot of money from Greece in comparison to other European countries. However, any effects from the problems in Greece could affect Ireland and this could become a problem to the UK; Ireland owe a large amount of debt to the UK and could be effected if they cannot receive this back (Financial Times, 2012).

It is impossible to say for sure how events will eventually unfold in Greece as time will only tell. It does not look too promising at the moment though. It is time for Greece to attempt to stand on their own two feet again. If they are not able to do this in the foreseeable future then it may be unlikely that they have a future in the euro currency.

Sources used:

Barton, Newell & Wilson

BBC News

Debt help bureau

Financial Times

Guardian

Wall Street Journal